Futures Unchanged Ahead Of The Fed Announcement

Ignoring the latest batch of bad news overnight from China (where we learned that home prices fell in half of the cities tracked on a MoM basis while home prices rose in the fewest cities in two years, corroborating reports that the housing market there is softening even as the housing bubble is now shifting to the UK) and of course the ongoing rehypothecation scandal which apparently nobody is allowed to talk about, all it took was a little USDJPY nudge to send the Nikkei nearly 1% higher while algos trading US equity futures are now focused solely on today's 2pm FOMC announcement. The market expects few surprises in terms of policy with another $10bn taper and with rates staying on hold. Given this, eyes have turned towards the other data points the FOMC will provide us with – namely their Summary of Economic Projections (including the now famous dot plots) and the post-meeting Q&A session with Chair Yellen.

There has been growing debate in market’s about the possibility that this data-point heavy June meeting might mark the beginning of a more hawkish sounding Fed. This debate gained some additional firepower yesterday with the above-expectation CPI (2.1% YoY vs 2.0% expected) and core CPI (2.0% YoY vs 1.9% expected) readings. We should note that the dots were likely finalized before yesterday's reading.

To be sure, it is suddenly not fun being a Fed president (or Chairmanwoman) these days: with yesterday's 2.1% CPI print, the YoY rate has now increased for four consecutive months and is above the Fed's target. Concurrently, the unemployment rate has also dipped well below the Fed’s previous 6.5% threshold guidance, in other words the Fed has now met both its mandates as set down previously. There have also been fairly unambiguous comments from the Fed’s Bullard suggesting that this is the closest the Fed has been to fulfilling its mandates in many years. Finally, adding to the "concerns" that the Fed may surprise everyone were BOE Carney’s comments last week that a hike “could happen sooner than the market currently expect."

In short: continued QE here, without a taper acceleration, merely affirms that all the Fed is after is reflating the stock market, and such trivial considerations as employment and inflation are merely secondary to the Fed. Which, of course, we know - all is secondary to the wealth effect, i.e., making the rich, richer. But it is one thing for tinfoil hat sites to expose the truth, it is something else entirely when it is revealed to the entire world.

Elsewhere, a cautious tone is prevailing in Asian EM ahead of today’s events. Bourses in Indonesia (-0.2%), Korea (-0.4%) and China (-0.4%) are trading lower and a number of key EMFX crosses such as USDINR (+0.3%) and USDIDR (+0.8%) are indicating that there is some nervousness about today’s FOMC. The Chinese government released its latest home price data showing that prices fell in half of the cities tracked on a MoM basis. In addition to that, Chinese home prices rose in the fewest cities in two years, corroborating reports that the housing market there is softening. The stronger USD is helping USDJPY today (+0.15%) which is also giving Japanese equities a bid (Nikkei +0.6%).

Outside of Asia, all the recent conjecture about potentially a more hawkish Fed has taken its toll on the emerging markets complex in recent days. The CDXEM index is down in price for the last 6 days, and the MSCI EM equity index is on a five day losing streak. Certainly the individual domestic themes in the likes of Poland, South Africa and Argentina haven’t helped while the broader Russia and Iraq concerns have only added to the poor sentiment. Overnight, Argentina’s economy minister Kicillof said that it would begin steps to swap restructured bonds into local law in an attempt to make it easier to continue making payments on restructured bonds but avoid the ruling of the US Supreme Court who effectively ruled that it can’t make bond payments until it compensates holdout investors. Kicillof said that the plan has been studied extensively “so that the reconstruction of Argentina isn’t jeopardised” but he also hinted that the country could come to a negotiated settlement with holdouts saying that “we’re not willing to make just any concessions and accept any terms”. Argentinian bonds closed weaker yesterday. Elsewhere in EM, fresh from Kenya’s debut issuance and the strong EM demand seen there, Ecuador has priced its first international bond since its $3.2bn default on foreign debt in 2008. Yesterday’s transaction raised US$2bn of 10yr funds at a yield of 7.95%, which was a fair bit tighter than initial price thoughts somewhere in the low 8% region.

European shares rise though are off intraday highs with the telco and
oil & gas sectors outperforming and media, financial services
underperforming. The Dutch and Spanish markets are the best-performing
larger bourses, French the worst. The euro is little changed against the
dollar. French 10yr bond yields rise; U.K. yields decline.

Treasury yields lower overnight after short-end yields sold off yesterday following a stronger than expected CPI report raised concerns that FOMC meeting will show a more hawkish stance.

BoE policy makers said a rate increase this year may be more likely than investors anticipate as the debate on the timing of the first policy tightening in seven years heats up

The green shoots of inflation are coming at about the worst time for corporate-bond investors as duration is approaching the record high reached last year

The global economy faces a new threat as a spike in the price of crude foreshadowed economic slumps in each of the last four decades; economists are worrying after Brent touched its highest price in nine months

Argentina will seek to move its overseas bonds into local jurisdiction to skirt a U.S. court ruling forcing it to pay holders of defaulted debt in full

Iraqi Prime Minister al-Maliki fired at least four senior military commanders after the collapse of his northern command last week, as his remaining troops engaged Islamist militants north of Baghdad

Ukraine said it will call a unilateral cease-fire in days after three months of clashes with pro-Russian separatists rocked its easternmost regions

Apart from digest the release of the most recent BoE meeting minutes, there was little for market participants to contend with. The minutes revealed that the MPC voted 9-0 to keep rates unchanged and despite noting that the low probability markets puts on 2014 rate hike is surprising, refrained from adjusting slack estimates. As a result, Gilts surged higher, dragging Bunds into positive territory. Focus going forward will be firmly on FOMC rate decision and accompanying press conference.

EQUITIES

Despite the looming risk event (FOMC), stocks in Europe are seen broadly higher (Eurostoxx 50, +0.23%), benefiting from somewhat dovish BoE minutes. On the sector breakdown, telecommunications outperformed, benefiting from reports that Amazon said in talks to determine who will be the European provider for its new smartphone with O2 and Vodafone (+1.4%) in contention

FX

Muted price action was observed overnight in Asia and in Europe this morning until the release of the BoE minutes which were interpreted as more dovish following hawkish comments by Carney last week. The minutes also noted that the low probability markets puts on 2014 rate hike is surprising. Following initial bout of volatility, GBP lost ground vs. EUR and the USD.

COMMODITIES

WTI crude futures recovered off overnight lows and moved into positive territory following reports that Iraq's Baiji refinery tank caught fire after being shelled, according to Iraqi police.

API Crude Oil Inventories (June 13) W/W -5700k vs. Prev. 1500k

Safe-haven related flow which saw spot gold recover off overnight lows amid reports that ISIS militants are in control Iraq Baiji refinery was short-lived, with prices soon reversing and moving lower, with the focus firmly on the FOMC decision. Latest press reports indicate that Iraqi military have blocked an attempt to control the Baiji refinery.

The next hurdle for the market is tonight's conclusions from the latest two-day FOMC meeting. The market is expecting few surprises in terms of policy with another $10bn taper and with rates staying on hold. Given this, eyes have turned towards the other data points the FOMC will provide us with – namely their Summary of Economic Projections (including the now famous dot plots) and the post-meeting Q&A session with Chair Yellen. Given the past quarters bounce back in some US economic statistics after Q1’s bad weather there has been growing debate in market’s about the possibility that this data-point heavy June meeting might mark the beginning of a more hawkish sounding Fed. This debate gained some additional firepower yesterday with the above-expectation CPI (2.1% YoY vs 2.0% expected) and core CPI (2.0% YoY vs 1.9% expected) readings. We should note that the dots were likely finalised before yesterday's reading.

Nevertheless in a note yesterday DB’s Joe LaVorgna argued that US inflation is in the midst of a cyclical uplift pushed along by the Fed’s asset purchases, an uplift which is only likely to build as the US unemployment rate (currently at 6.3%) continues to approach its long-term average of 6.1%. In spite of this DB’s Peter Hooper thinks it is much too early to expect the Fed to turn more hawkish today. On the macro front he points to the still too high unemployment rate, generally too low inflation rate (including the preferred PCE measure), signals from the housing sector which remain mixed at best (see yesterday’s disappointing housing data including a May -6.5% MoM Housing starts reading vs -3.9% expected) and business investment which still shows little evidence of a self-sustaining recovery. On a slightly more technical note Peter also highlights that the June meeting will see three new members of the Committee voting, all of whom are likely to be supportive of Yellen’s policies at this point in time. Given these factors Peter thinks the Fed will be happy if today’s statement and press conference prove uneventful for markets. We'd agree with Peter that tonight is unlikely to see much boat rocking from Yellen and her fellow committee members.

One can understand the nerves ahead of the FOMC though. Back to CPI, the YoY rate has now increased for four consecutive months and unemployment has dipped well below the Fed’s previous 6.5% threshold guidance, so there is some basis for the divergent views this month. There have also been fairly unambiguous comments from the Fed’s Bullard suggesting that this is the closest the Fed has been to fulfilling its mandates in many years. Nevertheless we can’t help but wonder if this month’s FOMC would be as keenly anticipated were it not for Governor Carney’s “could happen sooner than the market currently expects” comments last week. Certainly yesterday’s CPI numbers gives pause for thought, but the Fed’s preferred inflation measure, PCE Core, was still a fair way below the target at 1.4% YoY in April. In terms of the bond market reaction yesterday, the shorter end held in relatively better with 2 years trading up 1.2bp in yield while the longer end underperformed in comparison (10yr +5.5bp). Notably, there wasn’t any meaningful retracement in yields yesterday and the USTs finished the day at close to its weakest level. Also an interesting reaction in equities, with S&P 500 futures dropping almost half a percent following the inflation and housing data, before quickly retracing those losses that saw the S&P 500 close 0.22% higher. Cyclicals outperformed on the day with financials (+0.93%), consumer discretionary (+0.3%) and IT (+0.2%) enjoying the best of the gains.

A cautious tone is prevailing in Asian EM ahead of today’s events. Bourses in Indonesia (-0.2%), Korea (-0.4%) and China (-0.4%) are trading lower and a number of key EMFX crosses such as USDINR (+0.3%) and USDIDR (+0.8%) are indicating that there is some nervousness about today’s FOMC. The Chinese government released its latest home price data showing that prices fell in half of the cities tracked on a MoM basis. In addition to that, Chinese home prices rose in the fewest cities in two years, corroborating reports that the housing market there is softening. The stronger USD is helping USDJPY today (+0.15%) which is also giving Japanese equities a bid (Nikkei +0.6%).

Outside of Asia, all the recent conjecture about potentially a more hawkish Fed has taken its toll on the emerging markets complex in recent days. The CDXEM index is down in price for the last 6 days, and the MSCI EM equity index is on a five day losing streak. Certainly the individual domestic themes in the likes of Poland, South Africa and Argentina haven’t helped while the broader Russia and Iraq concerns have only added to the poor sentiment. Overnight, Argentina’s economy minister Kicillof said that it would begin steps to swap restructured bonds into local law in an attempt to make it easier to continue making payments on restructured bonds but avoid the ruling of the US Supreme Court who effectively ruled that it can’t make bond payments until it compensates holdout investors. Kicillof said that the plan has been studied extensively “so that the reconstruction of Argentina isn’t jeopardised” but he also hinted that the country could come to a negotiated settlement with holdouts saying that “we’re not willing to make just any concessions and accept any terms”. Argentinian bonds closed weaker yesterday. Elsewhere in EM, fresh from Kenya’s debut issuance and the strong EM demand seen there, Ecuador has priced its first international bond since its $3.2bn default on foreign debt in 2008. Yesterday’s transaction raised US$2bn of 10yr funds at a yield of 7.95%, which was a fair bit tighter than initial price thoughts somewhere in the low 8% region.

Looking at the day ahead, the Bank of England publishes the minutes from its June 5th MPC. Following the surprising comments from Carney last week, these minutes will be more closely watched than previous months. In EM, updates on Russian industrial production, South African CPI and Brazilian inflation are expected today. There will be a quarterly earnings announcement from FEDEX. Interestingly, Ben Bernanke speaks at the Federation of European Securities Exchanges in Zurich today, about 15 minutes before the FOMC policy statement. But clearly the main event today is the FOMC policy announcement due at 7pm London time, followed by Yellen’s presser half an hour later.